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Managing the Modern Treasury a Presentation to the Financial Executives International by Bruce C

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Managing the Modern Treasury a Presentation to the Financial Executives International by Bruce C Managing the Modern Treasury A Presentation to the Financial Executives International by Bruce C. Lynn, CTP August 15, 2018 Agenda The traditional role of corporate treasury Why treasury’s scope needs to change Key policies and procedures for the modern treasury function Best practices for the modern global corporate treasury Making it happen – transitioning from traditional to modern Q & A, discussion 8/15/18 © The Financial Executives Consulting Group LLC 1 The Traditional Treasury • Focused on Processing • Resources devoted to repetitive tasks Advanced Risk Planning Goals Mgt (Mkt, Credit, Ops) Cash Management (focus on balances) InvestmentCash Debt Basic Cash Accounting Processing (focus on posting, reconciling transactions) 8/15/18 © The Financial Executives Consulting Group LLC 2 The Traditional Treasury • Number of S & P companies using cash flow metrics is low • % of time spent on “strategic” activities is low S & P 500 Free Cash Flow (FCF) Mention % Year in 10K Defined? D =423 2002 38 19 9 2007 79 28 2012 94 46 2017 121 61 29 Source: Georgia Tech Financial Analysis Lab Report - April 2018; Source: Business of Treasury 2018, Association of ProEDGAR Online Database, www.pro.edgaronline.com/ Corporate Treasurers (ACT) 8/15/18 © The Financial Executives Consulting Group LLC 3 Polling Question 1 Q1 - Is Your Company Considered "Investment Grade“ by a rating agency or bank? Not Sure, 17% Yes, 34% No, 49% 8/15/18 © The Financial Executives Consulting Group LLC 4 The Traditional Treasury (2) Key Metrics Used 2017 Sales Sales Treasury Department Success 2014 All < $ 1Bn > 1Bn Reduced Borrowing Costs 58% 63 57 69 Liquidity Targets 55 62 57 66 Reduced Banking Expenses 51 49 43 53 Risk Management Effectiveness 49 39 42 38 Capital Structure Support 47 55 46 63 Income Generation 28 32 37 28 • Metrics are mostly P & L oriented • 51% of Treasuries feel organization NOT using its capabilities* • 36 % Treasuries NOT part of executive committee or “C suite”* Source: AFP 2017 (344 responses) p10, p11, p24 / 2014 p11, p12 (243 responses) Strategic Role of Treasury Surveys 8/15/18 © The Financial Executives Consulting Group LLC 5 The Traditional Treasury (3) Source: 2017 AFP Strategic Role of Treasury Survey, p3 8/15/18 © The Financial Executives Consulting Group LLC 6 The Traditional Corporate Treasury (4) Daily cash management operations • Obtain yesterday’s bank transaction data, identify exceptions, update A/R and A/P records • Prepare today’s cash worksheet, identify borrowing/investment levels, execute transactions • Heavy transaction processing workload Bank Relationship Management • Maintain lists of banks, contacts and accounts • Periodically review / negotiate credit facilities • Monitor activity / fees via account analyses 8/15/18 © The Financial Executives Consulting Group LLC 7 The Traditional Corporate Treasury (5) International Support • Execute FX spot and forward transactions • Assist foreign units to set up pools, netting, etc. • Managed as a separate unit within Treasury • Limited knowledge of tax impacts of treasury activities Capital Markets • Support CFO in negotiations for public debt issues • Limited knowledge of alternative markets / instruments • Intercompany borrowing opportunistic and uncoordinated Treasury personnel have limited experience • Treasury staff recruited from banking/cash/accounting background; mostly domestic, not involved in the business • Promotion usually internal; Treasury staff have low visibility and rarely move into non-financial functions 8/15/18 © The Financial Executives Consulting Group LLC 8 The Traditional Corporate Treasury (6) Bottom line • Treasury viewed as a processing (not strategic) unit or cost-center -> value added seen as low • Limited planning or policy responsibilities • Problems are solved rather than prevented • Highly dependent on spreadsheets, emails and multiple bank systems because: Treasury systems not priority for corporate IT No integrated views of global cash position or future liquidity needs (i.e. forecast) • Low headcount - “outgunned” by Controllers or other financial or operating units 8/15/18 © The Financial Executives Consulting Group LLC 9 Polling Question 2 Q2 - Key Issues To Confront Your Company in 2019 70% 60% 50% 40% 30% 20% 10% 0% Maintaining / enhancing Delivering operating Ability to access Measure “success” on a Not sure / too soon to revenue profits across all "enough" liquidity risk adjusted basis tell business units 8/15/18 © The Financial Executives Consulting Group LLC 10 Why Treasury needs to change External factors • Competitive nature of business = 24/7 demands “global cash visibility” and alternatives in the capital markets (i.e. do I have enough of the “right” credit?) • Demand for interaction with key corporate customers – “my AR is your AP”; not all customers are profitable • More complex/unpredictable financial markets New US tax laws – increases after tax debt costs, limits interest expense deductibility More complex transactions – Use of derivatives expands the need for pro-active management of FX, interest costs, commodities Activist investors seek “best” use of cash (or give it back!) • Regulatory or accounting changes, e.g. Brexit, Basel III (liquidity ratios), lease accounting (leases are debt too) 8/15/18 © The Financial Executives Consulting Group LLC 11 Need for Change – External Trends Rates increasing now that Jerome Powell is Chairman (6 FT) 8/15/18 © The Financial Executives Consulting Group LLC 12 Need for Change – External Trends Rates going higher: More borrowing = more cost 8/15/18Source: JP Morgan Asset Mgt, Guide© to The Mkts,1Qtr18 Financial Executives Consulting Group LLC 13 Need for Change – External Trends FX rate always uncertain Stronger Euro +15% = More expensive to fund in USD 8/15/18 © The Financial Executives Consulting Group LLC 14 Need to change – Internal Factors Internal factors • International business and associated interco. FX risks have become more visible • Quality of a company’s financial management is increasingly recognized as a key competitive factor • 70%+ senior management seeks focus on liquidity, risk and working capital management (per 2017 AFP survey) • Skills from FX hedging programs can be applied to other risk management issues • Keeping up with the competition = strategic views needed Acquisitions - Improving market means higher prices? Best use of funds - CAPEX vs Debt Repay? Cash - Use it or “lose” it (i.e. payouts to investors) 8/15/18 © The Financial Executives Consulting Group LLC 15 Need for Change – Internal Trends How much liquidity is “enough” ?- sources Companies still liquid, but due to ops or borrowings? Companies stillCompanies liquid still liquid Earnings coverage lower => ?how to cover maturing debt Source:8/15/18 JP Morgan Asset Mgt, Guide to© Mkts,1Qtr18. The Financial *Other Executives financings Consulting = C/P, Group municipal LLC securities, mortgages, loans 16 and advance Need for Change – Internal Trends How much liquidity is “enough” ?- uses More cash to Investors = less “left over”? 8/15/18 © The Financial Executives Consulting Group LLC 17 Source: JP Morgan Asset Mgt, Guide to Mkts, Dec 2017,1Qtr18 How much risk (debt / free Need for Change – Internal Trends 1,500 1,300 Snapshot - S & P 500 Non Financial Companies (425 co.) 1,100 s 900 $ in Billion 700 (Selected Results - 12 months ending 3/31/18) 500 Tech = ok. Services? Utilities? Varies by Industry: 300 100 cash flow) is “too much”? 175 -100 78 01 - Basic Materials 38 252 15 83 8/15/18 02 - Capital Goods 73 Working Capital 31 4 350 03 - Conglomerates 4 1 1 67 87 370 04 - Consumer Cyclical 1,319 27 Total Debt S/T + L/T 16 05 - Consumer Non-Cyclica 80 304 18 542 48 © The Financial Executives Consulting Group LLC 66 06 - Energy 186 23 200 604 08 - Health Care 91 633 731 252 74 Cash + S/T Inv 139 09 - Services 220 10 - Technology 576 166 Free Cash Flow11 - T12Monthsransportatio-23n 32 9 12 - Utili-51ties 12 -3 18 Need for Change – Internal Trends Treasury to CFO: We may not have “enough”? S & P Non Financial Companies (423 companies) Quarterly Trends as of 3/31/18 5,000 450 Debt 4,500 400 4,000 350 3,500 300 3,000 Cash trend flat; free cash flow trend 250 2,500 down. How much cash is enough? 200 $ in Billions in $ 2,000 Cash 150 Billions) ($in Flow Cash 1,500 100 1,000 500 50 0 0 QTR8 QTR7 QTR6 QTR5 QTR4 QTR3 QTR2 QTR 31Mar18 Cash + S/T Equiv. Total Debt S/T + L/T EBITDA Free Cash Flow Cash Flow Ops 8/15/18 © The Financial Executives Consulting Group LLC 19 Why Treasury needs to change (2) Consider this near term scenario : • Your competitor has highest cash levels in 5 years giving them CAPEX, R & D options • Your debt / equity ratios are steady (but that “can” kicked down the road is still there) • Market forces cannot be controlled “Guarantee” of low interest rates has ended • Bad news : variable rate debt to cost more • Good news : higher earrings on invested cash No assurances FX rates will remain stable Floating NAV or other restrictions limit MMFs Is Treasury equipped for this scenario? • Measuring “success” is key? • What outcomes will determine it? • What metrics to use? (Hint: Fee Cash Flow) 8/15/18 © The Financial Executives Consulting Group LLC 20 Why Treasury needs to change (3) The Role of Treasury Today Top 10 (of 21) Leads Supports Borrowing long term (capital funding / sourcing) 79% 6 Investing – long term 61 15 Payment Strategy & Execution (in / out) 60 24 Working Capital Mgt 54 28 Capital Planning / Allocation 50 31 Counterparty Risk Analysis 49 24 Internal
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